Don’t let data monsters run amok

Opinion: Seasonal factors, random one-offs weigh on real news

By

MarekFuchs

Columnist

New home sales, consumer confidence, durable goods, the latest, greatest GDP draft or Lululemon’s earnings? A lot of economic statistics are coming down the pike this week, not to mention earnings from the peddler of inadvertently transparent yoga garb. Which will give you the most accurate bead on the direction of our turbulent, seemingly rudderless economy?

Why Apple stock will grow

Assuming lasting good news emerges this week, the stock market spent last week skipping along like a room without a roof. The Dow Jones Industrial Average
DJIA, -0.32%
finished the week up 1.5%, to 16,302.77, with the S&P
SPX, -0.23%
up nearly as much.

Before we amble over to an educated guess at the answer, you know how the media are going to play it, right? Like they always do: for a rotating series of utter certainties. Be cautious, or you are bound to get hurt.

Here’s how it will work: the latest statistic to hit up (say, housing) will provide the overarching story line about the direction of the economy. The takeaway: conclusion reached. Then the next statistic will hit up (durable goods, perhaps) and provide an entirely new story line. The takeaway: entirely new conclusion reached.

That’s the way it always rolls through weeks like this offering rafts of economic reports. Statistic. Conclusion. Statistic. Entirely new conclusion. Rinse and repeat.

Unless you find contradiction soothing, this won’t work.

In terms of larger meaning, of course, most economic data should go the way of all flesh – here today and gone tomorrow, if not sooner. Obviously, though, the media too often does its best Victor Frankenstein imitation, breathing life into statistics, creating monsters. In the case of this week, it stands to create a veritable army of monsters, all running wild in opposite directions.

So inquiring minds need know: what’s the alternative to this great waste of print, pixels and brain cells?

Any traders worth their salt have to, in the lead-up to a statistics dump like the one we face, step back from media convention to craft a formula of sorts. At the center of this formula is the operation assumption that you should, at minimum, reach no conclusion before it’s time — which, in this case, means the end of the week. Only then can you even think about a larger thread of thought about the economy.

At that point, what package of statistics should you pay attention to, in what proportion and why?

Right away, you can forget Lululemon Athletica Inc.
LULU, -0.33%
, as you can any story stock. In other words, any stock roiled by particulars (in this case, the knee-slapping issue of see-through workout pants) can never be used as fodder for larger conclusions. Avoid that at all cost. Lululemon should contribute nothing to our formula.

GDP, on the other hand, normally would qualify — as the third and final draft will be reported this week. That is the only draft that should ever play a role in any notion about the direction of the economy. With apologies to decades of conclusions rendered by the media, the first two drafts are often revised by upward of 50%. The problem here, if course, is that historically bad weather in chunks of the country impacted business. That’s why this GDP reading, even though a third, has a good chance of showing a false negative — it could look grimmer than expected, thanks to the freeze-drying nature of the cold. As a result, if the revision appears disappointing, we have to ignore it and move on.

By the same token, we need to ignore a surprisingly good number. That’s because — politics aside, love it or hate it — Obamacare may have boosted health-care spending in a one-time way in January, when the law took effect. Barack or blizzards, the impact on business will be too hard to accurately parse out. So skip GDP as readily as Lululemon.

Speaking of mitigating factors, skip Tuesday’s housing numbers too, whether they look like birds in flight or dead ducks. Monthly housing numbers always lurch about — even more so these days. There is rarely a better way to make a small fortune out of a big one than building a conclusion around short-term housing numbers. Moreover, factors impacting GDP obviously impact housing, so stay clear.

Consumer confidence and durable goods orders seem like likelier bets, but between everything from increased spending on energy to unpredictable demand for commercial jets, variability is the order of the day, patters are hard, if not impossible to detect, and you would be far better

The upshot? Avoid all conclusions out of this week. Due to an endless series of variables, they’ll make falsehoods look like truth — something we learned from Frankenstein is best avoided.

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